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Gold Nuggets: COVID-19 Changes the Landscape of Gold Demand

What do the Q1 results tell us about gold’s market dynamics? Will changes intensify in the future, and how?

With COVID-19 likely continuing to reverberate global economies as they reopen, what is the outlook for gold amid the changes?


This post was written with contributions from Diego Andrade and Maxwell Gold, CFA. Diego is a Senior Gold Strategist in the Global SPDR Business and Maxwell is the Head of Gold Strategy with State Street Global Advisors.

At first glance, it might seem that the COVID-19 pandemic had only a very limited impact on the global gold market in the first quarter of 2020. As the chart below shows, total demand was little changed, at 1,083.8 metric tons — actually 1% above Q1 2019. But this superficial similarity with prior periods masks some very real changes taking place within gold’s internal market dynamics — changes that look like they may increase in intensity as the rest of the year unfolds.

Q1 Gold Demand Holds Steady… but the Sources Shift Dramatically

First-quarter statistics show some significant emerging trends in gold demand. Once stay-at-home orders took hold across various countries, it quickly became obvious that the demand for gold jewelry was going to drop substantially. China was the first country to be hit hard by the virus, and India imposed perhaps the most draconian lockdown measures. These two countries are regularly the two largest consumers of gold jewelry in the world.1

As for the rest of the world, jewelry stores were mostly closed and defined as non-essential businesses, leaving online merchandising to try to take up the slack – with varying degrees of reported success. In the final tally, global demand for gold jewelry fell 39% year-over-year, with the biggest declines coming in China and India at 65% and 41%, respectively.

What One Hand Taketh Away, the Other Giveth Back

But gold demand history illustrates an unusual compensatory mechanism, in that during periods when jewelry demand drops dramatically there is often a significant pickup in demand for investment, as investors seek the benefits of gold’s status as a safe-haven asset.2 And so it proved during the opening three months of 2020, when the demand for gold as an investment soared a full 80%.

These trends sharply rearranged the typical gold demand landscape. As the chart above shows, jewelry normally accounts for anywhere between 50% to 60% of total demand; in the latest period, jewelry dropped to just 30%. Investment demand, meanwhile, which typically runs at 20% to 30% of the total, climbed to 50%. The remaining 20% of demand was attributable to uses in technology and net purchases by central banks. These changes are already much more dramatic than what we witnessed in 2009, during the immediate aftermath of the global financial crisis. Back then, jewelry demand softened to 50% of the total, while investment demand edged upward to account for 40%.3

Life After Q1: Can the Good Times Start Rolling Again?

What of the future? Notably, many of the pandemic-related lifestyle changes did not occur until well into Q1, with the lockdowns in China and India only in force for about half of the period. Stay-at-home orders did not become widespread in most states in the US until mid-March. The authors warn that the impact of COVID-19 on the gold market may be far more dramatic in Q2.

With the world reopening in only very slow increments, we expect jewelry demand to be hit even harder in Q2. One ray of hope is that the adoption of online merchandising by jewelers in China clearly appealed to the tech-savvy younger generation in Q1, with one leading retailer reporting that their digital store attracted a substantial number of new customers within two days of its launch in late February.4  Online sales are likely to accelerate in the coming months, and this could help to mitigate some of the overall decline in demand for gold jewelry in China. In addition, local government initiatives to stimulate the economy and promotions by the retail jewelry trade may also help to limit the expected decline. In March, many cities distributed e-vouchers in a bid to boost consumer spending, while leading jewelry retailers offered discounts on a wide range of products. As a result, the year-over-year decline in Chinese jewelry sales in March was lower than in February.

As for investment demand, net inflows into US gold-backed ETFs year-to-date have already reached $14 billion, higher than all of 2019.5   Inflows in April totaled $9.3 billion, suggesting that Q2 could see investment demand potentially growing even more than it did in Q1. There is no question that the demand landscape may see even more dramatic changes. The gold price is up over 14% year to date and up over 33% on a rolling 12-month basis.6 Any surprise to the upside in jewelry demand versus expectation, coupled with continuing strong investment, could be supportive for the gold price.